Macro Problem Set 6

2. A decrease in the average level of prices of goods and services is: A. Deflation. B. Recession. C. Depression. D. Inflation.

A. Deflation.

12. A friend tells you that his income has risen every year by 5 percent. At the same time prices, on average, have risen by 5 percent. Your friend claims he is better off. Your friend: A. Is experiencing money illusion. B. Really is better off as he suggests. C. Has experienced an increase in nominal and real income. D. Has experienced an increase in real income only.

A. Is experiencing money illusion.

8. Real income is: A. Nominal income adjusted for inflation. B. The amount of money income received in a given time period, measured in current dollars. C. The use of nominal dollars to gauge changes in income. D. The basis for indexing of price changes.

A. Nominal income adjusted for inflation.

7. The amount of money income received in a given time period, measured in current dollars is: A. Nominal income. B. Real income. C. Relative income. D. Consumer Price Index.

A. Nominal income.

3. Relative price is: A. The price of one good in comparison with the price of other goods. B. A decrease in purchasing power because of rising prices. C. The amount of income a particular good requires. D. The current price paid for a good or service.

A. The price of one good in comparison with the price of other goods.

11. Money illusion is the: A. Use of nominal dollars rather than real dollars to gauge income or wealth. B. Movement of taxpayers into higher tax brackets as nominal income increases. C. Focus on real dollars rather than nominal dollars to determine purchasing power. D. Uncertainty that occurs because of inflation

A. Use of nominal dollars rather than real dollars to gauge income or wealth.

9. Inflation ________________ the purchasing power of money. A. Increases B. Decreases C. Does not affect D. Stabilizes

B. Decreases

10. Generally speaking, which of the following groups would tend to gain real income from the wealth effects of inflation? A. People with fixed income B. People who have passbook savings accounts C. People who own assets that are appreciating faster than the inflation rate D. People who hold all of their assets in the form of cash

C. People who own assets that are appreciating faster than the inflation rate

5. All of the following are microeconomic consequences of inflation except: A. A price effect. B. An income effect. C. A wealth effect. D. A profit effect

D. A profit effect

1. Inflation is: A. A rise in the price of every good and service. B. An increase in relative prices of all goods and services. C. A situation in which purchasing power increases. D. An increase in the average level of prices of goods and services.

D. An increase in the average level of prices of goods and services.

6. Which of the following is not true about your nominal income? A. It is the amount of money you receive during a given time period B. It is measured in current dollars C. It is not an accurate measure of purchasing power D. It is the same as your real income

D. It is the same as your real income

4. The redistributive mechanics of inflation include all of the following except: A. Price effects. B. Income effects. C. Wealth effects. D. Output effects.

D. Output effects.